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[9 comments]

Tesco follows in Amazon's mobile footsteps

May 13, 2014

Following on a successful launch last year of a budget tablet, Tesco is planning to introduce an Android smartphone by the end of 2014.

Launched last September, the Hudl tablet sold 400,000 units in its first three months and has subsequently sold more than 550,000. With an introductory price of at £119 ($200) but with fewer features than Apple's iPad, the Hudl was designed to compete with Amazon's Kindle and other mid-level tablets. An upgrade, the Hudl 2, arrives this September.

But the surprising news last week was that the U.K's largest supermarket chain plans to introduce a smartphone with specs 'comparable' to Android models such as Samsung's Galaxy S5, albeit again at a cheaper price.

Amazon has found strong success with its Kindle and is also reportedly developing a smartphone. The Nook has underperformed for Barnes & Noble.

Much as Kindle is connected to Amazon.com, Tesco's smartphone, and the Hudl, will include a "T-button" to provide instant access to Tesco's digital services, including online shopping for groceries, banking and Blinkbox, the retailer's on-demand music and movie service. A scan-and-pay option is promised to arrive later this year.

Most don't expect Tesco's smartphone will match the specifications of Apple's iPhone or top-notch Android devices, but similarly to other retailer private label efforts around food, apparel and other categories, a slightly scaled back version may offer some appeal.

Matt Warman, head technology writer at The Telegraph, wrote that part of The Hudl's success was that it "appealed to a market that simply didn't think an iPad was for them. The brand appeal of Tesco cuts through the idea that only a certain kind of geek is interested in the latest gadgets."

Still, the technology learning curve for competing with Samsung, HTC, Apple and others is expected to be steep. Markos Zachariadis of Warwick Business School wrote on Forbes.com, "Breaking into that category directly and gaining the slightest market share is going to be very difficult for new starters like Tesco."

FINANCIALS:     [LON:TSCO] [ NASDAQ:AMZN] [ ]

Discussion Questions:

Should other retailers join Amazon and Tesco in developing their own tablets and smartphones? What are the pros and cons for retailers developing their own brand consumer electronics products versus food, apparel and other traditional private label categories?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What's the likelihood that private label mobile devices will be commonplace over the next 10 years?

Comments:

Companies such as Tesco and Walmart are large enough to support another category in their stores for private label tablets, phones, and even televisions. The problem is that these items are purchased not once a week or once a month, but maybe once a year or two. That changes the model of a supercenter a bit. It does provide an outlet to those who cannot afford the name brand products.

I think it is a good idea and maybe a passing fad. Support, returns, and keeping up with the major players will be the issues they will need to deal with going forward.

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Frank Riso, Principal, Frank Riso Associates, LLC

Well the interesting thing here is one might typically conclude that they should stick to what they know - retailing - and let the techies take care of the technology, but look at what Starbucks is doing with their app, as we discussed last week. Apple has an opportunity to be the platform to teach other retailers, so why not Tesco?

Fortunately or unfortunately, the lines are blurring between your core business and how you now must also be in the technology business to survive and thrive.

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Zel Bianco, President, founder and CEO, Interactive Edge

NO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Retailers should stick to their areas of competence. There's no reason for everyone to enter an already crowded market. I understand the appeal of the idea ("If they have my tablet they will be more likely to buy from me.") but -- for most retailers -- electronics and technology are not their businesses and the impact on the bottom line would be prohibitive.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Apparently Tesco found a market that was willing to pay for the features offered by Hudl for a low price rather than another tablet for a higher price. By giving consumers features they wanted for a reasonable price, Tesco demonstrates an understanding of its market. If the new phone offering hits the market with features it wants at a lower price, Tesco will reinforce the image of giving its customers what the want.

Other retailers may start designing some products but will probably wait to evaluate Tesco's success before following this lead. The challenge is to find a balance between fewer features and a low price. Deleting features consumers really want won't work.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

For other retailers to join Amazon and Tesco in offering their own tablets and smartphones, they have to be ready to take on the task of becoming a technology manufacturer as well as a retailer. Issues such as software releases and technical support can rapidly bring a retailer out of their area of comfort. In addition, technology margins have shrunk to the point where they are not dramatic, although still higher than traditional grocery store margins.

The key benefit of branding the tablet and smart phone are the direct line to the consumer, where consumers can press a button and order directly from the grocer's ecommerce site. That ease of use feature should result in additional share of wallet and retention for targeted consumers, which will pay out the development and launch costs for the device in the long term.

Net, net, branded tablets and smartphones can be a viable strategy for retailers with lower margin, highly competitive environments, with sufficient scale to compensate for the higher startup costs of technology.

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Mark Price, Managing Partner, M Squared Group, Inc.

Although online sales are currently growing at a faster pace than in stores, they are still only a fraction of overall sales. No one knows at what point that growth will slow or reach its saturation point. If too many retailers start developing their own tablets and smartphones, eventually there will be a sifting out.

Any retailer considering developing its own brand of tablet or smart phone should thoroughly evaluate whether doing so is the best way to serve its customers.

'RetailRetell'

Why shouldn't Tesco market its own smartphone and tablet devices (or Walmart or Alibaba or Verizon for that matter)? Amazon and Google have already pioneered alternative market models.

Each device can be shipped with certain built-in functions specific to the retailer (consider Kindle's Mayday button). A retailer can build in one-tap access to its own shopping list or loyalty apps if it so chooses, or a custom delivery mechanism for music and media. The goal would be to tie shoppers to the retailer's flavor of the experience and discourage switching.

A low selling price is a chief attractor - Tesco's Hudl tablet wins few design kudos, but it might be a bit easier to upgrade to the next model in year or two, compared with high-end devices that cost four times as much.

Retailers who choose to go this route are choosing to broaden their mission. This is not a decision to make lightly. Pricing on own-label smartphones and tablets seems to allow for razor thin margins. Any profit is not earned by selling the devices themselves, but by gaining a larger share of shopper engagement and transactions. Delivering a reliable experience is crucial. Customer support is crucial. Integration with online and in-store experience is crucial.

Establishing a base of known digital shoppers provides a channel for retailers to build sales of digital merchandise - music, movies, books, games and software - which are not easily sold off a shelf. Why leave that category unchallenged to Amazon and Apple?

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James Tenser, Principal, VSN Strategies

"People who are really serious about software should make their own hardware." Alan Kay.

"We are not in the software or hardware business, we are in the experience business." (Paraphrased Steve Jobs quote.)

"Mobile behind e-tail's bigger share of retail sales" Today's RetailWire.

Vahe Katros, Consultant, Plan B

Think of it as "private label" technology. I don't know whether these companies - including Amazon - are all gearing with their own design and management of production facilities - doubtful, since that is widely available in Asia. But for any company company with the market reach to justify it, there is no reason they shouldn't have their own PL technology products.

The point here is that a few large tech companies may dominate the field, but they themselves are NOT making their own devices. So why shouldn't the factories tweak the device to circumvent patents - if they can't license directly - and fill a private label niche for a growing number of companies who actually "own" the shoppers? I think we will see a LOT more of this.

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Adjunct Senior Fellow, Ehrenberg-Bass Institute

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